Introduction

The Financial Conduct Authority (FCA) Market Watch 75 (31 October 2023) highlights the importance of managing market soundings to protect market integrity and ensure compliance with the Market Abuse Regulation (MAR). Market soundings are interactions between the sell-side and investors that help determine interest in a transaction before its announcement. These interactions support the proper functioning of financial markets and price discovery by allowing issuers and investment banks to gauge investors’ opinions on possible transactions and to help determine their conditions, such as price, size, and structure. However, robust market sounding procedures are essential to manage the risks of investors inappropriately using inside information from these soundings.

In this article, we will discuss the sell-side requirements under MAR, the risks sell-side firms are exposed to in market soundings, best practices for managing market soundings, and how the Logwise Market Sounding module can help sell-side firms streamline their market sounding processes and ensure MAR compliance.


Sell-Side Requirements under the Market Abuse Regulation (MAR)

Disclosing Market Participants (DMPs) and Market Sounding Recipients (MSRs) both have obligations under MAR to ensure that market soundings are conducted in a compliant manner. DMPs are responsible for assessing and recording whether a market sounding will involve disclosing inside information, producing standardised procedures and scripts for communications with MSRs, obtaining consent from MSRs to receive market soundings and inside information, informing MSRs of their prohibition from using the information to trade relevant instruments, and making and maintaining records of all communications and information given to MSRs.

MSRs, on the other hand, must independently assess whether they possess inside information from the market sounding, taking into account both the DMP’s assessment and any other information available to them. They must also record the market soundings they receive and their inside information assessments, as well as establish arrangements to receive, manage, and control the internal flow of inside information on a ‘need to know’ basis.

The FCA has recently observed cases where MSRs have traded relevant financial instruments during the time period after a DMP has initially communicated with them or sought their consent to receive the sounding and inside information, but before the DMP has disclosed the inside information. In these instances, the MSRs were still able to identify the relevant financial instruments using other information available to them.


Risks Exposed to Sell-Side Firms in Market Soundings

Sell-side firms expose themselves to several risks when conducting market soundings, including the unlawful disclosure of inside information and insider dealing by MSRs. Unlawful disclosure of inside information can occur when a DMP inadvertently discloses inside information during the initial communication with an MSR, before obtaining their consent to receive the market sounding and inside information. Insider dealing by MSRs can occur when they trade relevant financial instruments based on the inside information they have received during the market sounding process.

Potential sanctions and reputational damage can result from non-compliance with MAR requirements, making it crucial for sell-side firms to implement robust market sounding procedures and effectively manage the risks associated with these activities.


Best Practices for Sell-Side Firms to Manage Market Soundings

To manage market soundings effectively and mitigate the risks associated with them, sell-side firms should consider implementing the following practices:

  1. Assessing and recording market soundings: DMPs should carefully assess and record whether a market sounding will involve disclosing inside information, as well as update these records throughout the course of the market sounding.
  2. Standardised procedures and scripts: DMPs should develop standardised procedures and scripts for communications with MSRs during market soundings, ensuring that no potentially sensitive information is unnecessarily disclosed.
  3. Obtaining consent from MSRs: DMPs must obtain consent from MSRs to receive market soundings and inside information, as well as inform them of their prohibition from using the information to trade relevant instruments.
  4. Monitoring and record-keeping: Both DMPs and MSRs should establish robust monitoring and record-keeping systems to track market soundings, inside information assessments, and communications with relevant parties.

Logwise Market Sounding Module: A Solution for Sell-Side Firms

The Logwise Market Sounding module offers a comprehensive solution for sell-side firms to streamline their market sounding processes and ensure MAR compliance. The platform provides an intuitive workflow that covers all aspects of a market sounding, from compiling information to investor outreach and cleansing. By automating many of the tasks involved in market soundings, Logwise reduces the risk of human error and helps sell-side firms maintain a robust compliance framework.

Benefits of the Logwise Market Sounding module for sales, ECM, and compliance teams include automatic personalised emails to investors, quicker acceptance of wall crossings, reduced manual overhead, multi device support, and simplified simultaneous cleansing of investors. The platform also offers a centralised dashboard for ECM teams to manage MAR market soundings and non-MAR private company investor engagements, as well as comprehensive reporting capabilities for compliance teams to monitor and track market sounding activities with instant reporting exports.

To learn more about our solution, click here.


Conclusion

Managing market soundings and mitigating the risks associated with them is crucial for sell-side firms to ensure compliance with MAR requirements and to protect market integrity. By implementing best practices and leveraging technology like the Logwise Market Sounding solution, sell-side firms can effectively manage and minimize risks, enforcing a robust compliance framework.



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